Educate parents and young adults in practical money matters

Imagine you’re about to set out on a road trip. You would absolutely need to have an idea of where you wanted to go – north, south, east, or west. You would have to work within the confines of how much time you had for this trip – that would determine how far you could go.

Your financial goals are no different than that road trip; failing to plan means planning to fail.

Even if you haven’t given retirement much thought, in terms of what it looks like and feels like, chances are you have an idea of when you would like to have the freedom to walk away. For those of you bemoaning that you will need to work until you die, it’s time to see if that is really true or simply your worst fear taking over and freezing you in your tracks.

But, you have to set your goals. You have to make this a priority.

The trouble is, unlike the mortgage payment or electric bill, there are no immediate ramifications if you don’t take the time to do this. It is important, but it is not urgent. The consequences of your inaction won’t be felt for decades. That is why it is easy to procrastinate – especially if you are suffering from paralysis.

There are a number of helpful calculators on line that can gauge where you are and where you need to be in order to meet your goals, such as the ones at Vanguard.

What I like about these calculators, is that they help you nail down the answers to the questions I raised in my last blog, A Plan to Overcome Paralysis.

If you are tired of worrying about the great unknown, here are your starting steps:

Determine how much will you need. The retirement expenses worksheet will help you get a handle on what your living expenses will be in retirement. You may not have a mortgage payment in retirement, but perhaps travel or hobbies may constitute more of your budget in retirement then it currently does.

Take inventory of the money you will live off of every month from fixed sources (e.g., pension, social security, rental income etc.) and plug it into a retirement income worksheet. The end result of this exercise is you will have a better sense of how much you will need to draw from your investments in order bridge any gap from your fixed income sources.

Plug in how long you plan on living in retirement. It is not unreasonable to expect to live into your nineties, so don’t short-change your life expectancy.

Enter how much you currently have saved and how much you want to be able to withdraw annually to supplement social security, pensions or other sources of income (see your retirement income worksheet).

Don’t forget to adjust the pie chart to the side, which asks for how your portfolio is currently invested (stocks, bonds, cash).

Once all that data is plugged in, you can run a simulation to see the probability of achieving your goals and not outliving your money based on the amount/type of assets you have, and the time frame you need the money to last over.

In the event the results that you get are unsatisfactory, don’t get discouraged. The numbers may not work, but you then can explore what it might take to reach that goal. You may need to invest more money, increase your allocation to stocks (if that risk level is appropriate), delay retirement, or plan on working a part-time job in retirement (or some combination of things). Then you can decide which sacrifices you are willing to make and whether these actions are enough to move the needle in the right direction. The control is yours; you get to decide.

Once you have a sense of the parameters you are working with, you will no longer randomly throw money into an account without rhyme or reason. You will know what you are working towards. Most important, this will free you up to actually envision what you want your retirement to be so you can begin to enjoy the process of planning with purpose. Then, you will confidently know what your destination is and how to get there.

My husband was up to something. He was pounding away at the computer and printing like a madman. When I didn’t hear the whir of the printer, there was the distinct sound of the three-hole punch chewing its way through paper.

“I’m working on something,” is all he would say. It seemed to excite him, this project. I wondered what it was.

When “it” appeared, it wasn’t impressive looking. It was a plain white three-ring binder.

“Open it,” is all he said, smiling.

I wondered if it was something romantic. I didn’t figure him as a poet; could I have missed that after all these years of marriage?

He was beaming like a cat that just dragged home a bird carcass as an affectionate offering.

“What is it?” I asked.

“The Death Book.” For some strange reason, he was still smiling. “In case something should happen to me, this book will tell you where everything is, who you need to contact…” he continued on, but I wasn’t listening any longer.

I recoiled from this stark white book like it was a jinx.

“Look at it, this is important,” he said.

He wasn’t smiling any longer. He looked irritated that I didn’t share his enthusiasm for The Death Book.

“It’s morbid,” I said, “I don’t like thinking about this stuff.”

“Well if something were to happen to me and you were stuck digging around trying to find out all this information, then you’d really be depressed.”

He flipped open the book, eager to show me that taking care of business from the great beyond would be his final loving act and would allow him to truly rest in peace.

In it was all the information I could possibly need: Copies of our wills, all the account numbers, passwords, and phone numbers for the kids’ college funds, our joint accounts and retirement accounts, information about his pension, the details of our life insurance policies, and social security information. He had totaled up what kind of payout I could expect. His excitement morphed into relief as he shut the book.

“Well, that’s that,” he said. “Everything is taken care of.”

I had the sense that he would sleep better that night knowing that this was off his shoulders. As for me, I told myself that The Death Book was the best insurance policy I could have that my husband would live a long, long life.

Want to Build Your Own Book?
There are books out there that you can buy, or you can simply get a three ring binder or folder and put the following in it:

“What’s your goal?” My husband’s question was simple, but I didn’t know if I should bother to share my complete answer, because it seemed unreasonable.

We hadn’t started our family yet, which was a goal of ours. But I wondered if winning Lotto was the only ticket to my other dream: to be able to stay home with our kids for as long (or short a time) as I wanted. Back then, my earnings were almost five times his salary and I doubted we could sustain ourselves on his take home pay alone, especially with the added costs of a baby. Sharing this thought with him might have made him feel badly; instead it motivated him.

“That’s it? That’s the goal?” Tony said, as if he had known it all along. “OK, give me some time, I’ll figure it out.”

I had it drummed into my head from friends and colleagues around me, who were enslaved to the double-income household: “There’s no way you can live on one salary – especially a teacher’s salary.”

Quietly I worried that I had given him a goal that was not within reach. I thought, maybe I could stay home for a year at most. I even started to accept that option, if it came to that. Thankfully, it never did. The more naysayers there were, the more determined he was to make a viable plan.

Stock piling became the first part of the strategy; generating investment income was the other component. We lived as if his salary was the only income we had, and aggressively saved and invested my salary and bonus. That is not to say that we didn’t enjoy ourselves. We made time for some travel; we ate out at restaurants within reason – but the savings/investing came first; what was left over was ours to play with. We put off starting a family until we felt we were on solid ground.

An interesting thing happened along the way. We had the opportunity to buy a small cabin in New England for a great price; it was very tempting and we came close to doing it. It was affordable based on our total income; but ultimately it would have taken us off our goal. When another opportunity presented itself — to move farther from New York City (where I worked) to an area we loved and where we wanted to raise our family– we struggled with the idea. I didn’t want all our savings/investing to dry up because this house was more expensive than the one we were living in. After careful consideration of all the numbers, Tony figured we could swing it, provided I was still willing to commute an extra 2 hours each day until we started our family. With trepidation, I agreed.

Then we faced a series of unexpected events. For starters I became pregnant and soon we found out we were expecting twins. Almost immediately, I ended up on bed rest. Short-term disability gave way to long-term disability, which was less than my salary (although I wasn’t spending any money commuting). When our sons arrived a full two months early, we were stunned. After more than two weeks in the neonatal intensive care unit, they were released to come home – but with all sorts of equipment (like an apnea monitor to detect the cessation of heart beats or breathing and caffeine to keep the heart beat rate up). To add to all this tension, I had used up all my leave and was due back almost as soon as the boys came home from the hospital. I still can’t say how I would have been able to leave my babies under those circumstances – or who we would have asked to take on such a grave responsibility. I am just so thankful that Tony thought to ask the question about my goals – and that I dared to utter it out loud. Otherwise, our backs would have been against the wall.

Many times, there isn’t one right way to reaching a financial goal. Sacrifices, compromises, and non-negotiable items differ by household. The point is the goal kept us focused and shaped all the decisions we made – we passed up opportunities to spend our money in favor of getting us closer to what was our top goal. Most important, had we not planned this out, I would have been headed back to my four-hour roundtrip commute; our preemie babies occupying my every thought. Some call it luck – but I know Tony’s careful planning and our commitment to reaching our (seemingly unreachable) goal had a lot to do with the blessings that came our way.

The financial wisdom I would like to impart is: Don’t be afraid to look at your dreams – even if they seem impossible to reach. Instead of thinking about why you can’t get where you want to go, ask how you might get there. Do this, and down the road, you may find yourself being referred to as the “lucky one”.

If there’s one thing that parenthood has bestowed on us, it’s the desire to be a better person. Suddenly with a pair (or pairs) of little eyes watching you closely, you become more aware of your habits (good and bad), your diet, your manners, and your temper – because someone is learning from you. Well, there’s a biggie that most of us haven’t given much thought to: money. For those of you with small ones, consider this time as good behavior training because even if your kids are too little to notice now, recent research indicates that children as young as 8 are ready to learn about money; and, the greatest impact on their knowledge is not any course they can take (if you can even find one) but on the behavior they observe at home. The study went on to say that behavior modification in older children is difficult; the key is to catch them early. So even though many of you have younger children, it’s never too early to get your household on track. This way, the practices your children adopt will be healthy ones that will come naturally to you. These simple first steps will lay a solid foundation:

When we have dessert, it’s served after dinner – When a child sees that Mom or Dad doesn’t always immediately gratify their retail purchasing urge, it teaches that not everything you want is needed, or some things are worth the wait. With toddlers, the currency can be giving up the bottle or diapers to “buy” something that they want. Having older children partake in saving for a portion of a pricey purchase can help teach them about setting goals and working toward achieving them, as well. In addition, they will start to understand the sacrifices you make to afford your lifestyle.

Make sure your eyes aren’t bigger than your stomach – Showing children that bills are paid in full and on time sends them the signal that they need to keep a handle on how much they spend. As you write the checks, let them know what you are doing and why you need to pay it on time. If carrying credit card debt is something they don’t see in life, it makes them less likely to abuse the cards themselves. This lesson is the single most important one to your future financial well-being.

If …. Then … Lessons – Show your kids the power of choices and the consequences to get across budgeting basics (e.g., “If we buy this flat screen TV, we won’t have enough for food.”).

Do as I Do – There are no greater imitators than kids. If they see you balancing the checkbook (even though they are not sure what that is), they will grow up knowing that is part of an adult routine. As they get older, you can even enlist their help in calling out the check numbers.

Make Saving a Game – When they are really young, nothing is more fun than the clink of change in a piggy bank, or a change sorter. As they get older, encourage kids to put away a portion of any gift money they get, as well as dedicating a portion to gifting. When they are old enough to get a bank book of their own, take them down to the bank. It will be a day they remember.

Story telling – Do you have a family member who overcame adversity (such as coming to this country with no money) only to live a successful life? Let them know that Grandpa started up his business with nothing in his pocket. Better yet, let him share the story. Kids love to hear true stories, and they’ll be better off for having heard these words of wisdom.

Starting early in their lives will make all the difference, and it will be time well spent for all of you. Remember: They are watching.

Dina Isola

Since 2002, Dina Isola has worked closely with investors, hearing their concerns. Drawing on her experiences and challenges, Real$martica was born, which focuses on making personal finance issues relatable to women, children and families and educating investors to make informed decisions. A contributor to A Teachable Moment, she is a client relations specialist at Ritholtz Wealth Management. She also serves on Stony Brook Children’s Hospital Task Force.